Hard money loans (also known as bridge loans) are a type of financing typically used by real estate investors. These loans are not issued by traditional lenders like banks, but by private companies and individuals. Hard money loans are a form of short-term financing, with the loan term lasting between 3 and 36 months, because investors don’t intend to hold on to the property for a long time.
Instead, they are interested in buying low and quickly flipping a sale for a profit. Since these practices can sometimes be risky, hard money mortgages generally have high interest rates. Hard money lenders use the property as collateral in this type of asset-based loan. If a borrower defaults, the lender is able to sell the property to help make up for any losses.
Current hard money loan rates 2019 range from about 7.5 percent to 15 percent. Most hard money lenders also charge points on a loan. Points are origination fees that help handle the administrative costs of the loan and mitigate the lender’s risk. One point equals one percent of the loan. For hard money loans, points can range between 2 and 10 percent of the total loan amount. Points are usually paid once upfront when initiating the loan, whereas interest is paid on a monthly basis.
When hard money lenders decide how much interest and how many points to charge on mortgages, they consider hard money loan requirements like your track record with real estate investing, the amount of equity you’re able to put down, and variables related to the property (how much work it needs, what kind of neighborhood it’s in, etc.) Unlike a traditional loan, hard money lenders are not governed. Therefore, their rates can vary wildly and each private money lender can have very different processes and unique requirements. That means it’s extremely important to shop around if you’ve decided to seek financing via a hard money loan. Always check the lender’s reputation to ensure they’re not a predatory loan shark. Make sure your rates are competitive and payback terms are fair and achievable.
Hard Money Loan Requirements
Though hard money loans can be a risky and expensive means of financing your real estate investment, they can have an attractive upside compared to a conventional loan if you’re able to quickly buy, fix up, and sell a property at a profit. The following hard money loan requirements are necessary for a loan to be beneficial.
Attractive Purchase Price
Most fix-and-flip style real estate investments are imprudent unless you’re able to get a very low purchase price on the property. In order to score a low price, the property will usually be in need of some repair. You’ll need to calculate the estimated costs of the repair and comparable sales in the area to determine whether there is any margin for profit on the investment.
Cash in Hand
Although your lenders hard money will cover the majority of the costs associated with the purchase of the property and some of the repairs, you’ll need to have some cash in hand. Not all hard money lenders require borrowers to make a down payment on the property, but most do.
Lenders want to see that borrowers have some skin in the game before going into business with them. Additionally, making a down payment mitigates some of the lender’s risk and can help you achieve a more attractive interest rate.
You will also need to have savings to cover repairs on the property. Some loans can be structured to include reimbursements for repairs. However, the borrower will need to pay cash upfront to get things started.
For example, in a house that needs a new roof, the borrower will need to put up the money to have a licensed contractor update the roof. When the job is complete, the lender will make sure the work is inspected and up to par. If the job is done to her satisfaction, she will reimburse the borrower the cost of the roof repair and allow him to move on to the next rehab to-do. Not all hard money loans are structured this way. In some instances, borrowers must foot all the rehab costs on their own.
Many hard money lenders are not interested in your personal credit and financial history as hard money loan requirements. Instead, they assign weight to your track record in real estate investing. If you can prove that you’ve successfully flipped properties for a profit in the past, hard money lenders will be more willing to work with you and to offer you loans with better hard money loan interest rates and lower fees.
They also might require a lower down payment amount, or even allow you to forgo a down payment altogether and purchase the property with zero down. There are some hard money lending companies that exclusively work with proven flippers. In some cases, the risk of working with first-time real estate investors may be too great.
Strong Personal Finance History
If you do not have real estate investment experience, some hard money lenders will review your personal credit score and financial history to gauge whether or not you are trustworthy and can responsibly pay back a hard money loan, even though these elements are not standard hard money loan requirements. If you have a good credit score, minimal debt, and money in the bank, you will be seen as less of a risk and you may be able to secure a hard money loan (though likely with higher interest rates and greater fees than someone with proven real estate success).
Hard Money Loan Example
To better explain how a hard money loan works, following is a very simplified real-world example:
Heather wants to try her hand at house flipping. But, she can’t afford to purchase a property on her own. She does not have the best credit and she does not have cash to use for down payment collateral. She has heard some hard money lenders offer 100 percent financing.
She contacts several lending companies and private investors and learns that these rates are only available to experienced flippers. One lender did offer to finance her project at 100 percent, but at an interest rate of 20 percent, which she knew she could not realistically afford.
Heather decides to hold off on entering the business for a year while she can get her finances in order. She pays down some debt and starts saving cash for a down payment. After talking with her brother, Henry, a contractor, they decide to join together. They pool their savings, $30,000, to put a 15 percent down payment on a $200,000 home. The home is outdated, but has good bones and is located in an up-and-coming neighborhood where sales are growing.
Heather and Henry shop around for a loan and end up working with a hard money lender who lets them borrow $170,000 at an interest rate of 8 percent. Though neither has experience in real estate investing, Henry is a well-known contractor in the local area, and the lender respects his work. Heather has improved her personal credit significantly, demonstrating financial responsibility.
The pair put $20,000 into renovating the home. They are able to work fast, since Henry can do most of the work himself. His work also makes the project more affordable. They end up paying interest for 3 months before selling the home, which roughly amounts to $3400 ($170,000 x .08 = $13,600 /12 = 1133 x 3 months).
When all is said and done, Heather and Henry sell the house for $295,000. In total, they invested $33,600 into the home (rehab work and loan interest). This earns them a profit of $101,400, which isn’t too bad for first-timers!
How To Get Better Hard Money Loan Rates
Compared to other lending options, current hard money loan rates 2019 can be expensive, with high fees and interest. But, there are some ways borrowers can work to drive down the rates for a private money loan to help make them more affordable and increase their profit margins.
The hard money lending space is not regulated, so the costs and practices of loan programs can vary extremely between private lenders. Hard money creditors each have their own internal processes and pricing. Some offer services nationwide, while others specialize in local markets.
Some prefer to work with serial residential flippers, while others like to deal with landlords of non-owner occupied multi-dwelling units. Some offer 100 percent financing, while others require 30 percent down to decrease the loan-to-value ratio (LTV). There are myriad elements that can influence the quote you receive from any given lender for current hard money loan rates 2019. Therefore, it’s important to get a second (and third and fourth …) opinion to ensure you are receiving the most competitive rates on your mortgage.
Grow Your Down Payment
There’s no doubt that coming in with a down payment alleviates some of the risk and makes a lender more apt to partner with you. A robust down payment serves as collateral and shows you are committed to the project with your own money at stake. In most cases, the bigger the down payment, the better the current hard money loan rates 2019. Putting more money down will also cause points and other fees to drop because the amount you’re borrowing will be lower. Start saving where you can to build up a larger sum for a down payment in order to make your rates more affordable. If that’s not an option, consider joining with a partner on the project and combining your cash into a more attractive down payment.
Build Your Experience
Some bridge mortgage lenders are leery of working with first-time real estate investors. No matter how much money they bring to the table, there can be so many twists and turns in the renovation process that won’t faze more experienced flippers, but can completely derail newbies. To get better hard money loan rates, it can help to build up your real estate resume before diving in. One way to do this is to apprentice with a successful real estate investor for some time to learn the tricks of the trade. You can also start with a smaller project that you can fund on your own to prove to lenders that you’re capable of making profitable, smart decisions. If you don’t have the time for either of those options, you can consider partnering with knowledgeable local realtors, mortgage brokers, or contractors who can help guide you through the process. Their commitment to the project will be appealing to hard money lenders.
Improve Your Personal Credit
While good personal credit is not a prerequisite of hard money loan requirements, it can be instrumental in lowering your rates, especially if you are a first-time real estate investor. A strong personal financial history demonstrates to a lender that you make responsible decisions with money and act with self-discipline. A few ways to work on building your personal credit include:
- Pay down existing debts like your mortgage, credit card bills, and auto loan balances. Lower your debt-to-income ratio.
- If you aren’t already, start paying your bills on time or even early, if possible.
- Stop opening unnecessary lines of credit. The 20 percent off they offer you for opening a store credit card is not worth the credit score hit you’ll take in the long run.
- Obtain and review your credit report. Contest any inaccuracies with the credit bureaus.
Establish Business Credit
If you are considering real estate investment as a profession, it can be helpful to start building up credit for your business. Not only will business credit make you appear reputable and professional to lenders, but it will also open up new potential financing options like business loans to help you grow your business. To start building strong business credit, consider taking the following steps:
- Make sure your business is formally established. Create a name for it and file for a local business license. Make sure the business has a dedicated address, phone number, and Web presence. Take care of any business filings that may be necessary for tax purposes.
- Open a bank account exclusively for your business. Only use it for business expenses – nothing personal.
- Take out a credit card in the name of your business. Use it now and then, even if you don’t really need to. Pay it off on time, always.
- Establish lines of credit with vendors and suppliers, like contractors and electricians. Pay them on time and in full.
- Ensure your business is being monitored by the credit bureaus. Obtain a business credit report to check your scores and correct any errors.
A strong business credit profile can help you lock down better rates on financing in the future, among numerous other benefits. Nav’s Business Boost and Business Loan Builder plans can help you start to beef up your business credit profile and report your good payment history.
Is Hard Money Lending a Good Investment?
As with any financial decision, there are a lot of factors that go into determining whether or not a hard money mortgage is a solid investment choice. Hard money loans make the most sense (and cents!) in the follow scenarios:
- You are confident that all property repairs and refurbishments can be done on a speedy timeline (i.e., a month or two, or less), so you can pay the mortgage back quickly.
- You are certain that the work you put in to the property will cost what you have budgeted, allowing room for a healthy margin after sale. Generally, house flippers make about 10-15 percent on transactions.
- You shop current hard money loan rates 2019 and find a deal that seems financially fair and easily repayable. You’ve checked the fine print for hidden deceptions, like balloon terms.
- Your lender is reputable and will support you throughout the process.
- You’ve enlisted the help of other trusted professionals like a realtor and a general contractor with local market knowledge.
- You have bad credit, but a talent for real estate. A traditional loan, business loans, or a cash-out refinance are not options, and a hard money loan is the only way to enter into the flipping business.
- You need money fast for a short-term investment, and you don’t have time to wait through the conventional mortgage approval process.
More generally, you will have to weigh the costs of the loan against the possible profit and the likelihood of challenges. Because hard money financing is more expensive compared to other traditional financing options like business loans, they work best in situations when they can be paid back quickly. There are huge opportunities for large profits in real estate. But, when complications arise and fixes take longer and cost more than anticipated, revenues can begin to disappear quickly, especially when you also have to repay the loan with installments for which you did not plan. However, with solid industry knowledge, responsible financial practices, and a willingness to work hard, current hard money loan interest rates can help you achieve real estate investment success.
This article was originally written on November 4, 2019 and updated on June 14, 2021.